Investing, Asset Allocation, Economics & the Search for the Bottom Line

US Housing Starts: March 2014 Preview

Housing starts are expected to total 930,000 in tomorrow’s update for March, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents a modest rise vs. the previously reported 907,000 for February.
The Capital Spectator’s median forecast for March is below a trio of consensus estimates based on recent surveys of economists.

Here’s a closer look at the numbers, followed by brief definitions of the methodologies behind The Capital Spectator’s projections:

VAR-3: A vector autoregression model that analyzes three economic series to project housing starts: new home sales, newly issued permits for residential construction, and the monthly supply of homes for sale. VAR analyzes the interdependent relationships of these series with housing starts through history. The forecasts are run in R using the “vars” package.

R-1: A linear regression model that analyzes the NAHB Housing Market Index in context with housing starts. The historical relationship between the data sets is applied to the more recently updated NAHB Housing Market Index to project housing starts. The computations are run in R.

TRI: A model that’s based on combining point forecasts, along with the upper and lower prediction intervals (at the 95% confidence level), via a technique known as triangular distributions. The basic procedure: 1) run a Monte Carlo simulation on the combined forecasts and generate 1 million data points on each forecast series to estimate a triangular distribution; 2) take random samples from each of the simulated data sets and use the expected value with the highest frequency as the prediction. The forecast combinations are drawn from the following projections: Econoday.com’s consensus forecast data and the predictions generated by the models above (VAR-3, ARIMA, ES and R-1). The forecasts are run in R with the “triangle” package.